June 14, 2014

WANT GROWTH? LET LOOSE THE HOUSING DEMAND:

The primary driver of this year's faster GDP growth is the $10-trillion rise in household wealth that occurred in 2013. According to the United States Federal Reserve, that increase reflected a $2-trillion increase in the value of homes and an $8-trillion rise in the value of shares, unincorporated businesses, and other net financial assets. As former Federal Reserve Chairman Ben Bernanke explained when he launched large-scale asset purchases, or quantitative easing, that increase in wealth - and the resulting rise in consumer spending - was the intended result.

Past experience suggests that each $100 increase in household wealth leads to a gradual rise in consumer spending until the spending level has increased by about $4. That implies that the $10-trillion wealth gain will raise the annual level of consumer spending by some $400 billion, or roughly 2.5 per cent of GDP. Even if less than half of that increase occurs in 2014, it will be enough to raise the total GDP growth rate by one percentage point.

The data show that a significant increase in consumption already is happening. Real personal consumption expenditures rose at a 3 per cent rate from the fourth quarter of 2013 to the first quarter of this year. Within the first quarter, the monthly increase in real consumer spending accelerated from just 0.1 per cent in January to 0.4 per cent in February and 0.7 per cent in March. That was faster than the 0.3 per cent monthly growth in real personal disposable income during this period, highlighting the importance of wealth as a driver of spending.